An announcement by Alberta Premier Ed Stelmach of a 20 per cent hike in oil royalties starting in 2009 has prompted concerns that oil and gas companies will be forced to slash jobs and investment dollars in Alberta.
The September report that recommended the royalties increases drew harsh criticism from the industry, which threatened to cut spending and lay off thousands of employees if the recommendations were implemented.
With oil companies turning record profits, the panel's report concluded that Albertans weren't getting their fair share of the province's non-renewable resources.
Although the $1.4 billion in higher royalties announced last Thursday is less than the $2 billion recommended by the government-appointed panel that reviewed the royalty formula, the increase has rattled the industry.
In the wake of the report, EnCana Corp. threatened to pull $1 billion in spending out of the province in 2008. Earlier this month, Crescent Point Energy Trust talked about moving approximately $150 million in investment next door to Saskatchewan.
Gary Leach, executive director of the Small Explorers and Producers Association of Canada, said the increase is likely to hurt investment in the energy sector.
"I think the government missed the mark on the royalty rates they are proposing for the conventional oil and gas sector. They are just a little bit too harsh… you can foresee lower investment activity."
However, the energy market remained stable the day after the announcement, with some stocks even seeing gains, but it still remains a question of what long-term effects the new royalty plan will have in Alberta.
An earlier report from the province's Auditor General blasted the government's energy policies. Stating that royalty rates could be increased even more than the review panel had suggested and still remain competitive worldwide, the report accused the government of lacking leadership and missing out on billions in royalties annually.
The last time the royalty scheme was altered in 1997, it was done to encourage investment in the oil sands. Since then, over $60 billion has been invested in the province, and oil is now trading four and a half times higher at $90 a barrel.
Jaana Woiceshyn, associate professor at the University of Calgary's Haskayne School of Business, believes the royalties increase has made Alberta "a lot less attractive to investors all of a sudden" because it removes incentives for developers.
"If the developers are not there to develop the properties and extract the oil then there are all kinds of ramifications, not just to the oil and gas companies but to all the people who do business with them and even to the extent of people who are just marginally related to this."
Predictability, says Woiceshyn, is what oil and gas operators and investors like.
Compared to other oil-producing regions, Alberta has been considered a politically stable place where contracts are respected. But with the royalties hike, the contracts of energy sector heavyweights Syncrude and Suncor have to be renegotiated.
This is an unprecedented move that puts Alberta in the same league as the more unstable oil-producing regimes such as Venezuela, says Woiceshyn.
While the big companies said they would not respond to the new royalty formula until they had time to review it thoroughly, Petro-Canada said last Friday that despite the royalty increase, it will carry on with engineering work on $15 billion worth of new oil sands projects.
Bob Schulz, also a Haskayne business professor, says a change made "in the first go-round" is that the government now has a sliding scale: if oil prices go down, the royalties go down. In the event of the royalties going down, the companies won't be hurt as much as if the royalties were fixed.
"The bottom line is that as long as the oil prices stay high there won't be any damage to the provincial economy, and as long as gas prices come back there won't be any damage," says Schulz, who was consulted by the government on the royalties issue.
As well as being criticized by the industry, Stelmach drew flak from opposition parties and environmentalists who said the 20 per cent increase isn't enough.
The Parkland Institute, a University of Alberta policy think-tank, released a report saying royalties could be raised by as much as 90 per cent without impacting jobs or investment.
The group made a number of recommendations, including scrapping the 1 per cent "royalty holiday" and suggests the province consider public ownership of mineral rights as a way of "maximizing revenues and playing a leadership role in the energy industry."
But as far as Woiceshyn is concerned, it's a "Marxist notion" that the government should own mineral rights; she believes they should be wholly owned by the private sector, which is how it works in the United States.
"They say they want to give a fair share to Albertans, but what's a fair share? There's no limit because it's arbitrarily drawn."
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